The New York Times Rent vs. Buy Calculator

Is it better to buy or rent? It’s one of the eternal personal finance questions, and one that each person has to decide for herself. There are lots of non-financial factors that affect this decision, of course, including your hobbies, lifestyle, and personal psychology.

Despite these non-financial considerations, often the choice comes down to money. What makes the most financial sense? In July, guest-author Tim Ellis shared his thoughts on the rent vs. buy debate with us. While re-reading his article recently, I followed a link to this beautiful rent vs. buy calculator from The New York Times.

This interactive tool allows the user to play with the numbers, providing immediate feedback after adjustments to predicted home appreciation or rent increases. Don’t overlook the panel of advanced settings — these can help you evaluate tricky scenarios.

This could be a handy tool if you believe you’ll have to make a decision whether to rent or to buy in the near future.

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Careful, the big assumptions that go into the tool are buried in the details:
1) The “annual home price change” slider is in NOMINAL prices
2) The “inflation” number is buried in the advanced menus and defaulted at 2%.
3) The risk free rate of return number is also fairly conservative, given how low the market is.

These numbers really affect the outcome, so guess wisely or run a bunch of scenarios and figure out your risk tolerance.

It is likely that real prices are going to be flat or slightly declining over the next decade.

I would use numbers like 2-4% for inflation and set the “annual home price change” at or under that by one. Keep in mind “annual change” is cumulative. I made my own calculator and it goes into a bit more detail but it has nowhere near this amount of polish on it.

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Megan

I’m just amazed at how many places there are where the rent is lower than a potential mortgage. I’m in central VA, and around here, unless you want to live in a wretched hive of scum and villany, you’re going to be paying as much or more in rent than you would for a mortgage- granted, I’m talking about a starter home mortgage- 1200-1500 s.f., decent but not spectacular neighborhood.

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Adam

this calculator confirms my rule-of-thumb: buying should only be considered if the purchase price is equal or less than 200-times the price of rent of a similar property.

so, if you can rent a 1 br condo for $1000/month and similar condos in the building cost $350k, it’s a dumbass move to buy. if the condos are less than $200k, buying should be considered (only if you know you’ll be there for a while).

in my town, wife and i can rent a 2BR house for $750/month. we should only consider buying when similar 2BR houses hit the $150k and below mark. right now, similar 2BRs are at $300K+, making it a stupid time to buy.

it’s funny how most of being financially responsible is simple math.

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brainscan

I love this tool!!! Where I live, my rent is about 50% what it would cost to buy now. So, I plugged in my current rent and the recent purchase price of a condo in my unit, and it says “Buying is never better than renting over 330 years”. So when my brother-in-law says “Why are you just throwing your money away renting?” I can say (under my breath) “kiss my a**”.

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SR

Aleks: if I *was* to do this, there would be serious conversations with the other people involved, preliminary credit and asset checks, and definitely a legal contract. It would be easy to set the house up as an LLC, and deal with it that way.

Sure, I’d love to have my own private place, but it’s just not likely to happen (by myself) for at least a few years. While I know the Seattle RE market is going to plateau for the next few years, it would be a way to have some property as an asset (yes, yes, I know the mortgage is a liability) and a place to call my own (though shared).

I don’t think this is a crazy idea, or an attempt for me to live beyond my means. For a long time, I lived alone (and loved it). In the past few years, I’ve lived with roommates, and I’ve enjoyed it more than I thought. Also, I wouldn’t imagine this would be a longer than 5-8 year thing. I think this is more of a way to be personally invested in where I live, and be able to see what it’s like to have (my own) place.

I also have experience living in countries where living solo is quite rare, and it’s an idea that I generally like. Why does home ownership have to equate with a single person (or a married couple) living somewhere??

I don’t think I should have to move to find RE I can afford. I’m not b*tching and moaning about being a renter. I actually love the flexibility of it — especially since I’ve spent about half of the last three years living or travelling abroad. I’m just thinking of a realistic way I could end up owning property in an expensive RE market. Instead of complaining “Oh, boo-hoo, I can never own property here,” I’m actively thinking of solutions.

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The Tim

Ron @ 28 said:

Does the calculator take into consideration tax benefits of the mortgage interest deduction? No.

To Ron and others that are making similar points about the mortgage interest deduction: Yes, the calculator does account for this.

From the methodology (link on the top-right):

The interest part of the mortgage payment, and in some cases, a portion of the common charges, are tax deductible. The resulting tax savings is subtracted from the operating costs.

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Aleks

“I’m not thinking of creating a commune, but I think it would be a way to buy in to a house without saving for a million years, and theoretically the mortgage could be paid down much quicker, with two or more people in a house.”

They’ve started advertising mortgages for that sort of thing around here, because houses are so expensive you need four incomes for first time buyers to afford them. Which is ridiculous. I don’t know where you live, but around here there is no justification for the prices. The median price is something like 14 times the median income. There’s no way that is sustainable.

Overall I think buying a house with other people is risky. What if one of you loses their job? What if somebody wants to move? What if you find that paying $1500 a month to have roommates really sucks? I think that if you have to do something crazy like that to be able to buy, you shouldn’t be buying. Either wait till the market deflates or move somewhere else where your income is more in line with house prices.

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Jon @ The Money Mythos

It doesn’t surprise me in the slightest that buying is never, ever better than renting in the Boston, Massachusetts area.

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SR

Another thing I’ve thought about for a while, but I’ve not seen written about, is people buying homes with another person *who is not a current or future spouse.* I live in an expensive real estate market, and I’ve thought about what it would be like to buy a place with another person. I’m not thinking of creating a commune, but I think it would be a way to buy in to a house without saving for a million years, and theoretically the mortgage could be paid down much quicker, with two or more people in a house.

Financially, this makes a lot of sense to do something like this [if you live in an expensive RE market].

Has anyone done this or read about this?

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Anne

@Ron – the calculator does take into account the mortgage interest deduction. You can change your tax rate under the advanced settings.

@Aaron – the calculator does take into account transaction costs. They default to 4% for buying and 6% for selling but you can change these under the advanced settings.

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Aaron Pinkston

This calculator also doesn’t reflect the liquidity of a savings account over home equity or the realtor fees you need to pay to get out of your house. There are also other loan programs besides a 30yr fixed. This issue is very complex and emotional.

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Adam

I think that today’s arguments for buying must focus entirely on non-monetary arguments. The pride of ownership and not having to call your landlord if you want a pet. I guess those things are fine, but for me, and I think for many of today’s younger people, we’d rather make the smarter financial decision (renting) and put our identity in something other than a chunk of land with some walls on it.

Plus, if you are financially solid renter with a good rental history, you can have your choice of landlords and write certain things into the contract…such as being able to garden, change the color of the walls, and request substantial notice if the property is going to be taken off the rental market. If the landlord says “no,” then you can go to any of the innumerable similar rentals on the market. Furthermore, with all the people in over their head with the recent real estate boom, the choice of properties that we renters can choose from is outstanding. It’s not a buyer’s market. It’s not a seller’s market. It’s a renters market.

I suppose there are parts of the country (Tennessee, Michigan) where strong financial arguments can be made for buying. My comments are based on my situation in Colorado.

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Sandy

Ron made the point, do you Really know what home appreciation will be over 10 years? I’m a good example. I bought a house in CA for $175,000 in 1995 – 10 years later, in 2005 (granted when the market was high), I sold it for $612,500. That 30 year mortgage was paid off in 10 years, and then I moved 30 miles away where I could pay cash for a house in the $400’s.

There was a family living next door to me renting, and the owner’s son moved into town, so the owner gave that really nice family 30 days to vacate! He was an Asst. Athletic Director at UCSB and couldn’t afford to buy and had to move his family out of State. I personally would not want to rent for that reason. I’ve seen this kind of thing happen a couple of times to renters, and I myself couldn’t be at an owner’s mercy like that.

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James Crocker

J.D. Here’s a great question you should answer in an upcoming article.

In light of many of the interesting facts presented by the tool and in these comments. When does it make the most financial sense to buy a home.

I.E. Is it only when you make a 20% down payment on a 25 year mortgage at less than 6.0% when the housing market is expected to appreciate at 3% a year?

I’m pretty sure there’s a “best window” of opportunity when you should buy a home.

I realized with this tool, I would have been MUCH better off not making as big of a down payment on our home as I did.

I realize there are other non-financial reasons why one would want to own a house, but ‘the optimal time to buy’ would be an interesting thing to figure out.

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Ron

I’m having a hard time seeing the benefits of using this calculator.

Do you REALLY know what the appreciation of your home will be over the next 10 years? No.

Do you REALLY know how much your landlord will increase rent EXACTLY over the next 10 years? No.

Does the calculator take into consideration tax benefits of the mortgage interest deduction? No.

Does it consider the personal benefits of owning a home such as being able to garden, adding a home addition if you want, or being able to change the paint/decor without having to get permission from a jerk of a landlord?

Was it probably written by renters or by landlords who need more renters? Yes.

It’s a neat, interactive graph, but beyond that, buying vs renting is more than just a robotic, financial decision, made by a declining newspaper’s cute little Java application.

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SR

I’ve seen this calculator before, and I was surprised when it said that buying would never be better than renting for me. Currently, I have a low rent (live with roommates), and if I use that amount now, there is never a point when buying is a better deal (no, I don’t plan on living with roommates forever). I played around with the calculator, and using the 2%/4%/220k/10% down default percentages, I found that I’d have to be paying close to the monthly mortgage payment (~1200) before it would even start getting close to being a better deal to buy, or that house appreciation would have to be 5% or higher. So, it seems that if you’re living on your own, and paying $800-1000 in rent, buying is generally better, and that if you pay less than $800, you’re likely better renting.

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The Tim

Tom @ 22 Said:

How will you pay your rent when you are 85?

You use the interest from the massive liquid investment you built up by investing the cost difference in renting during the 30 years that the home buyer was paying down a mortgage on a house that they would now have to sell in order to get their hands on any of the money from the “forced savings account” they spent all that time building.

Just sayin’.

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FinanceIsPersonal.com

Definitely a fun toy to play around with, but it can be a bit hard to get some good comparative data.

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Adam

It’s a terrible time to buy! Where I live, you can rent the exact same house (literally, the house where I live is for sale) for about 60% of the INTEREST PAYMENT alone. If you are smart enough to invest the difference (just between rent and the mortgage interest payment) or even just save it in a 3% savings account, you end up wayyyy ahead. You would have to be a seriously irrational crackhead to buy a house right now. Plus, I get reimbursed when I buy a programmable thermostat. Beat that.

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Sandy

Issa: I see what you’re saying, re the baggage part, and not everyone’s lifestyle is the same. I’m probably a lot older than you. Looking back, I rented all throughout my 20’s because I was single and must have moved about 7-10 times! In fact, it wasn’t until I was 33, that I got my first house, and that’s because by that time, I was married with a 3 yr. old. So I see your point. Keep in mind though I doubt very many people stay in the same house for 3 decades. We were in that first house for 4 years, then got a job transfer, and went to another State for 6 years – moved again, and then again. Each time we sold, we got back all the payments we made every month for the years we lived there, and then some due to appreciation. That wouldn’t have happened if we rented. But you are doing what is right for you at this particular time in your life. It reminds me of a quote I like: “There is only one success – to be able to live your life in your own way.”

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Tom

Yes, but does anything take into consideration that one day you will want to/have to retire?

At some point when you are buying, the mortgage is paid and you owe nothing but taxes and maintenance.

How will you pay your rent when you are 85?

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Issa

Sandy: There is no ownership for the renter, but that’s the whole point of renting. Ownership is baggage. If your lifestyle dictates that your baggage be minimal, why on Earth would you buy? I did my calculations and it would take 7 years for me to earn back anything. 7 years! I have no idea where I’ll be in 7 years! And I’d still have 23 before I owned it free and clear. I’ll buy when I figure out where I wanna be for the next 3 decades.

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Issa

HA!!! MY DAD WAS WRONG!! “Blahblah, at least you’ll be earning equity,” NOT IF I’M IN THE HOLE BETWEEN A DOWN PAYMENT AND A LACK OF APPRECIATION.

There’s no point in buying a home in a place where you’re not sure you’re gonna be in 2 years when the home costs half a damn million dollars and it’s not EVEN in the nicest neighborhood.

Booyah, Father. Booyah.

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Frugal Bachelor

Frugal Bachelor thinks about buying a house (or, preferably, a condo) every once in a while, but whenever he runs this tool it comes back and says “Buying is never better than renting over 30 years if…” He cannot make the numbers work out in favor of buying a house, no matter what. Part of the reason is that in Texas there is NO income tax, but very high property tax, factors which greatly favor investing over buying real estate.

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Sandy

In most cases, home ownership – even when financing is included – is preferable to renting. At some point, the mortgage payments will end, and ownership will be achieved. There is no ownership for the renter — ever.

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Aleks

I like this calculator because it’s very graphical and dynamic, but like every other buy/rent calculator it’s dependent on the assumptions you make. Obviously if real estate appreciates faster than inflation, buying is a better option. But since the US is in the middle of a deflation and my area is on the brink (hopefully) it’s hard to guess what to enter for a realistic guess. What’s the annualized rate of change years if it goes down 30% in three years, stays flat for two more and then appreciates at 6% for another five? And what about price decompression?

Besides which, I don’t need a calculator to tell me that renting is the better option right now, nor do I intend to rent forever. Where’s the calculator for renting till prices bottom out and then buying with a bigger down payment?

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Justin

If you want to account for the fact that it’s investing the differences, drop the return rate (under the “General” advanced settings) to 0%. It should remove that from the calculation.

What I was most surprised about was the effect that even one percentage point has in the home appreciation and rental increase. I’d been playing with this calculator for a little while before JD posted it. It’s not as pretty a picture for me as I would like. But that’s the way it works sometimes.

I also agree with Hank [8] about the non-monetary benefits of owning over renting (or vise-versa, in Cerise’s case!).

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Rhonda

The answer to this question is simple:

(A) It makes more sense to buy a house in an increasing market.

(B) It makes more sense to rent a house in a declining market.

It’s that simple!

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Sandy

I’ve always looked at owning a home as a forced savings account. I agree that the average renter isn’t going to invest the extra money saved. I know I would not have, so when I paid off my house last month, I was grateful.

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James Crocker

Yes, under the methodology tab, it does presume investing both the down payment, and the presumed difference between (House Cost minus Renting Cost).

So I don’t think this is apples to apples with reality, and could be giving alot of people a false sense of security. Since in all likely hood your average renter is not going to be investing the extra money saved by not buying a home.

Although this is a -wonderful- illustration of why you should.

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James Crocker

So in the comparison this calculator makes does it assume “IF YOU INVEST the difference you save by renting, here’s your ROI break even point.”?

I.E. If renting ends up costing you $200 less in monthly costs, and if you were to invest that ‘extra’ money at 8%, it would only be better to buy this home after 6 years… or whatever.

Is that what it’s doing?

If so…. that’s something that’s financially true, but in actuality, very few people are going to sit down and figure out ‘how much they’re saving’, and then choose to invest that much more.

As a result, failing to invest your ‘extra’ money kept by renting would lower the break-even point on your home significantly.

I’d better go read the calculator instructions again…

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Cerise Ly

It may be “cheaper” financially to own rather than buy but I am one of those people who do not derive “notches” from home equity appreciation. I’m more fixated on the “soris” of dealing with lawyers and closing costs and comparable real estate in the event of the sale in addition to my unfortunate position on owning similar to some men’s position on marriage, I can imagine enjoying a McMansion with all the amenities for all of four days before wanting to skedaddle and owning would not stop me from perusing real estate porn on a near daily basis nor would making a property “mine” make me see my property as unassailable when viewing newer younger fresher real estate. Agh, I hate having this queasy empathy for commitment phobe men but no other group is as analogous to my position on owning. But since I do own, owning prevents me from dabbling in short term sublets in more attractive properties nevermind purchasing a second upgraded property.

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Cerise Ly

It may be “cheaper” financially to own rather than buy but I am one of those people who do not derive “notches” from home equity appreciation. I’m more fixated on the “soris” of dealing with lawyers and closing costs and comparable real estate in the event of the sale in addition to my unfortunate position on owning similar to some men’s position on marriage, I can imagine enjoying a McMansion with all the amenities for all of four days before wanting to skedaddle and owning would not stop me from perusing real estate porn on a near daily basis nor would making a property “mine” make me see my property as unassailable when viewing newer younger fresher real estate. Agh, I hate having this queasy empathy for commitment phobe men but no other group is as analogous to my position on owning.

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Jordan

wow, according to this, to buy a similar apartment to the one I rent, it would be worth it in about 3 year. If only there were apartments for sale in the area i want to live in.

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Hank

Anne, Thanks for pointing out the advanced settings. I overlooked these on my first trip. I like the tool much better now, especially since it told me that I was better off buying after only two years in my six year old home.

In my case, (1) I doubled in size from the rented space to my owned home, (2) I got a two-car garage to replace my shared parking lot, and (3) I no longer had to live in a shared building with 15 other families. These are some things that are hard to put a dollar value on.

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Anne

Hank, if you click on “Renting,” “Buying,” and “General” under “Advanced Settings” you’ll see that these types of things are factored in, and you can customize them. Although granted, it does not factor in the idea of paying *more* in utilities for a rented home compared to an owned one (just the other way around). You would have to increase the rent payment to have the calculator account for additional utilities.

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Aaron

I dig the tool, but its math doesn’t seem quite right when you adjust the mortgage length. Drop it down to something like 5 years, and the math is clearly wrong. It was saying I was saving $50k/yr by renting after 30 years when I paid off my mortgage in 5. Very silly.

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Matt Wolfe

This is a great tool. I fooled around with this a couple months ago and listed a few possible scenarios on my blog. I basically concluded that, with housing prices the way they are in San Diego and home values actually dropping, buying never seems to get better than renting. That may turn around again because this market is cyclical but, as of two months ago, buying was not better than renting.

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Hank

While it is helpful, it does make a ton of assumptions that are not defined. If you buy a pre-owned home you might get things like drapes or blinds which can cost thousands when buying a new home. When renting, are you buying renter’s insurance and how will your utility bills change? I was renting a 900sqft apartment paying twice the amount for utilities as I had to pay for the 2050sqft home that I bought in 2001. What about tax relief? A $1000 mortgage payment on a 30 year loan will get you approximately $11K in tax deductions the first year not including any credits or deductions you get for local taxes paid. That is approximately $250 per month in income tax savings based on a 28% tax bracket. I realize some of this was considered in the calculation methodology. It would be nice to have more specifics on the methodology behind the calculator.

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The Tim

This is by far the best and most comprehensive rent-vs-buy calculator I’ve seen out there. It’s great because it accounts for a lot of factors that most people don’t think of (and most other calculators leave out). Plus, the interface is very user-friendly, but still allows control over the details if you want.

The results that you get out of this calculator are probably the best estimate you can find for the rent-vs-buy topic.

Just be sure you enter a realistic estimate of appreciation. Depending on your area, that will likely be 0% or less in the next few years, and unless something stokes another real estate mania, I wouldn’t count on more than 5% long-term.

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Velvet Jones

Wow, what a great tool. I’ve been thinking about buying a house in a couple years. According to this tool, it would be 12 years before buying would outweigh renting. Very interesting.

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Jeremy

That is about the nicest rent vs. buy tool I’ve seen, and it allows for a lot of customization. It actually made our scenario a bit better than we planned for. We expected about 6-7 years in our home to make buying worthwhile, but this tool was leaning towards 3-4.

Probably has a bit to do with moving from a higher cost of living urban area where we were renting to a much lower COL rural area, so our mortgage is actually the same or slightly less than our monthly rent was.

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